Local Revenue, Tax Limitations, and Other Tax Solutions

More is better, but the answer depends on the legislation passed.

If more local governments participate in a split tax, their communities see stronger economic effects. If fewer participate, the effects are more diluted. Legislation could allow cities to split all local property tax levies, split only those of directly overlapping local governments, or allow voters to choose which levies to split. 

In Pennsylvania, split tax benefits are limited because they are only used by city governments, not counties, school districts, or special taxing authorities. In Michigan municipalities, city governments and school districts together collect the majority of property taxes, so including these jurisdictions would be a meaningful start. 
 

All of them. 

Under conservative assumptions for tax-base growth drawn from Pennsylvania, all local governments gain revenue. This would reverse the sixty-year decline in Detroit’s property tax base, a trend that has hit Detroit’s schools and libraries hardest. 
 

There is no change in school funding.

It is compatible with Headlee limits, but makes them less damaging for local governments.

Under the 1978 Headlee Amendment, Michigan local governments may not raise their total tax receipts by more than the rate of inflation each year. Using tax-base growth estimates from Pennsylvania, we expect that Detroit’s local governments would exceed their Headlee limitations, rather than falling short as they do in most years. Regularly exceeding the Headlee cap would also mean that local tax rates would gradually fall under the “rollback” rule. If a split tax adds taxable property in Detroit, local governments could increase their tax receipts above the Headlee limitation or reduce millage rates. 
 

Detroit can’t do so without harming local services, particularly when the tax base is declining.

Unless Detroit increases its tax base or receives large transfers from the state or federal government, there is no way to reduce the millage rate without short-term harm to schools, policing, libraries, and other basic services. (It is likely, but not certain, that a lower tax rate in Detroit would slowly increase the value of the tax base. Local governments would still lose short-term collections until assessments catch up).

If Detroit can increase its tax base with a better tax structure, reducing the millage rate could further improve Detroit’s competitiveness and create deeper tax relief. This has to be weighed against options to pay down city and school debts, which put residents in control of the city’s future spending.
 

Other new taxes could complement a split tax and reduce tax burdens on property. New local taxes could be used to offset some property tax burden, or simply to increase local revenue. Georgia and Wisconsin require that new local sales taxes must be used to reduce property taxes. 

Alternative options have at least one one of four downsides: they fall most heavily on those with less ability to pay, they offer little revenue, they punish productive activities, or they are difficult to implement.

In a distressed city, many taxes fall most heavily on residents and businesses with the least ability to move. Those that have the option not to pay exercise it: they shop elsewhere, work elsewhere, or move elsewhere. A land tax does not have this effect.

Another commonly discussed option is to tax on a small set of goods, especially those used by richer households. When you apply a narrow tax–say, bar tabs–people shift their barhopping elsewhere or spend more time at restaurants in Detroit. A narrow tax tends to further narrow itself.

There may be a few goods, like hotels, parking, and sports tickets, that can’t be consumed anywhere but Detroit for the time being. It’s important to measure how large this source of revenue could be, and how this would change over time as people find options to do the same activities in a lower-tax location.

By contrast to almost all other goods, land is totally immovable. Taxing it can change its price, but it does not change people’s decisions about where to buy it or how to use it. Land is also an asset that is held by households and businesses with more ability to keep it in reserve.

All other local tax reforms would also have to pass at the state level, where options are constrained. For example, a local sales tax would currently require Michigan to reduce its statewide sales tax, because total sales taxes are constitutionally capped at 6 percent. Such reforms might support growth or improve tax equity, but past experience shows it is hard to reach agreement about them.
 

While cities like New York and Boston do this, the Michigan Constitution doesn’t allow it, with the exception of taxes for local school operations. 

A state constitution can be amended, but there are not good reasons to make property taxes more imbalanced. In a city like Detroit where everyone needs tax relief to operate sustainably–small businesses, manufacturers, rental properties–shifting burdens from a favored group of stakeholders to a less-favored one is not likely to produce broad recovery.